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Federal Tax Policies and Farm Households

Significant changes in Federal individual income and estate tax
policies have occurred over the last 10 years. Since the Federal
individual income tax affects a broad group of farmers and the
Federal estate tax can affect the ability to transfer the Nation's
farm businesses to the next generation, these changes are of
considerable importance to the farm community. Modifications to
Federal income and estate tax policies affect not only the
financial well-being of farm households but also the number and
size of farms, their organizational structure, and their use of
land, labor, and capital inputs.

What Is the
Issue?

A number of changes to Federal income and estate tax policies
are scheduled to expire in 2010. As the expiration date approaches,
the debate regarding the future of these policies is likely to
intensify, especially in light of the increasingly challenging
Federal budget environment. This report evaluates the impact of
Federal income and estate tax policies on the tax burdens and
financial well-being of farm households.

What Did the Study Find?

Over the last decade, Federal income tax changes affecting both
individual and business income taxes have reduced average tax rates
for all farm households. While nearly all farm households have
benefited from the changes, commercial farm (annual sales greater
than $250,000) households are the primary beneficiaries of many of
the business tax provisions, including increased expensing of
capital purchases, reduced tax rates on business assets, and a new
deduction for manufacturers, which is defined to include
farmers.

The cumulative effect of these changes to Federal tax policy has
resulted in the lowest Federal tax burden on farm income and
investment in a decade. The average tax rate for farm sole
proprietors was reduced from 17.1 percent in 1994 (and 17.8 percent
in 2000) to about 14.8 percent in 2004. Federal income taxes paid
by farm sole proprietors dropped from $24.9 billion in 2000 to $21
billion in 2004, a reduction of nearly 16 percent. Current average
tax rates are estimated to be at or below the 2004 levels.

Changes to Federal estate tax policies have increased the value
of property that can be transferred to the next generation free of
the estate tax and have reduced tax rates on estates still subject
to the tax. Special tax provisions targeted to farmers and other
small business owners have provided additional benefits. Those
changes have reduced the number of farm estates required to file an
estate tax return as well as the number required to pay tax and the
amount of Federal estate taxes owed. Based on simulations using
farm-level survey data, about 2.9 percent of the 38,234 projected
farm estates in 2009 are estimated to have enough assets to
necessitate filing an estate tax return. After deductions, only
about half of those farm estates will be taxable. The total amount
of Federal estate taxes owed by farm estates in 2009 is estimated
at $683 million.

The estate tax is scheduled to be repealed completely in 2010
before reverting to 2001 law in 2011. If allowed to go into effect,
the reversion to 2001 law would increase the share of farm estates
that owe Federal estate tax and total Federal estate tax revenues.
As many as 1 of every 10 farm estates would owe estate tax in 2011,
with total Federal estate taxes rising to about $2.55 billion, an
increase of nearly three times the amount estimated to be owed in
2009.

How Was the Study
Conducted?

This report uses both published and special tabulation data
obtained from the Internal Revenue Service to provide an overview
of the current tax situation for U.S. farm households and to
evaluate the importance of various Federal income and estate tax
policies. It also uses farm-level data from USDA's Agricultural
Resource Management Survey (ARMS) to estimate the effects of
various policies on Federal income and estate tax liabilities. ARMS
was also used to
estimate the number of farm estates, the number of estates that
would owe taxes, and total Federal estate taxes for the estates of
farm operator households.